Saturday, March 22, 2014

The virtue of a pragmatic central bank

The RBA understands that inflation has to cycle around the target if unemployment is to be minimised. Since other central banks don't really seem to, I am led to the conclusion that the difference is ultimately Australian pragmatism at work.

Australia has what appears to be the most utilitarian political culture on the planet, going back to the early days of European settlement but particularly through the influence of Chartism. Even the great policy shift away from the Deakinite Settlement (pdf) (White Australia, Trade Protection, State Paternalism, Wage Arbitration, Imperial Benevolence) was about what worked for risk management. We are a predominantly Anglo-Celtic enclave clinging to the coasts of a water-short, drought, fire and flood prone island-continent at the end of Asia: hence practical risk management and state-as-giant-utility being at the centre of public policy.

We also tend to be good at bureaucracy. (Perhaps a little too good.) But good at bureaucracy in this instance means good at policy clarity and transparency--a definite advantage for monetary policy expectations management.

Hence a pragmatic central bank that takes a broad, utilitarian risk-management view. The US is a bit more inclined to grand ideas and creating fetishes of order. Inflation targeting is a clear fetish; the clearer the narrower it is.

New Zealand does not quite make it to Australian monetary policy pragmatism, because it is a (much) smaller country, so a bit more inclined to become swept up in the latest ideas. Especially since it is a unicameral non-federal state. That Australia is a federation with a powerful Senate also encourages more persuasion and broadening-the-goodies compromise. More utilitarian pragmatism.